Friday, October 27, 2006

Some Hints On How To Value SatRad Vs. A Mature Broadcast Company

Sirius and XM traded up yesterday, possible a result of buyout rumors for Clear Channel, a mature broadcast company with admittedly low growth rates. So I looked up some comments made by David Frear, CFO of Sirius, at the Lehman and Bernstein conferences back in May to guide analysts on how to value the company:

At Lehman Conference, May 22, 2006

"We also came out earlier this year and decided to try and give you longer-term targets that would aid people in valuation, and so, we gave you $3 billion of revenue in 2010 and $1 billion in free cash flow. How should you think about this? A lot of people talk to us about valuation, they talk to us about how difficult it is to figure it out with a company that's early in development, and so, I guess the question that I might put back to you as you consider it, is that with $1 billion in free cash flow, what multiple would you put on that. A mature broadcast multiple today is about 14 times, but it's also a business, which evidences 1 to 2% top line growth rates, maybe low to mid single-digit free cash flow growth rates, and I would put to you that I think it's unlikely that satellite radio growth rates in 2010 will be that low and that we will not have gone standard in North American automobile production at that point. I do believe that ultimately satellite radio will be standard in North American automobile production and I think there is tremendous growth after that occurs. So, you should see the opportunity through a robust multiple in that year."

At Sanford Bernstein, May 31, 2006

"And in 2010, people have said, "well, jeeze, there's no targets here. You're still losing money. We can't do valuations." So, here's a target; $3 billion in revenue and $1 billion in free cash flow. So, I like to ask people, "well, what would you pay if you were looking at a broadcaster as a multiple of true free cash flow," and they frequently tell me 14 times. All right. That's a $14 billion valuation against the company's current valuation, which is probably roughly $7 billion. So, if a double looks good to you in four years, you should run forthe phones. And with that, let me open it up for questions. "

Since the above examples were at an even higher stock price, around $4.60, today's analysis would produce an even better return.

10/27/2006 09:26:00 AM

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